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ANALYSIS
Topic 1
Engr. Tafalla
November 30, 2015
Definition:
ENGINEERING ECONOMY is a discipline
concerned with the systematic evaluation of the costs
and benefits of the proposed business projects and
ventures. Its objective is to choose which among the
alternative course of action will give the maximum
benefit at the least cost.
Engineering Economy, therefore involves the
application of definite laws of Economics, theories of
investment and business practices to engineering
problems involving cost. It also involves the study of
cost features and other financial data and their
applications in the field of engineering as basis for
decision.
COST CONCEPTS
DEMAND is the quantity of a certain commodity that is bought at a certain
price at a given place and time.
SUPPLY is the quantity of a certain commodity that is offered for sale at a
certain price at a given place and time.
FIXED COST are costs that do not vary in proportion to the quantity of
output.
VARIABLE COST are costs that vary in proportion to quantity of output.
BREAK EVEN POINT is the level of production at which revenue is exactly
equal to total costs
Elements of Cost:
1)Materials
a) Direct Materials are those which are used in the
finished product itself.
b) Indirect Materials are those materials used in
production but which do not go into the finished
product.
2) Labor
a) Direct Labor is the actual work applied directly to
the manufacture of the product
b) Indirect Labor is the work necessary for the
operation of the factory, but which cannot be
identified with one particular process or product
manufactured.
3) Overhead Expenses
Expenses which cannot be allocated to direct
materials or direct labir.
PRIME COST = Direct Materials Cost + Direct Labor
Cost
PRODUCTION COST = Direct Materials Cost + Direct
Labor Cost + Overhead Cost
Or
PRODUCTION COST = Prime Cost + Overhead Cost
LAW OF SUPPLY
The supply of the commodity varies directly as the
price of the commodity, though not proportionately
p
r
i
c
e
Supply
LAW OF DEMAND
The demand for a commodity varies inversely as the
price of the commodity, though not proportionately
p
r
i
c
e
Demand
Quantity
p = a - bD
Demand (D)
R
e
v
e
n
u
e
TR pD
TR (a bD) D
or
TR aD bD 2
D'
Volume (D)
TC TVC TFC
TC vcD TFC
Variable Cost
Fixed Cost
Volume (D)
or
R
e
v
e
n
u
e
Represents the
Maximum Profit
Total Cost
a vc
2b
D*
Volume (D)
Formulas:
Price:
p a bD
Total Revenue:
TR pD
TR (a bD) D
or
TR aD bD 2
TC vcD TFC
Profit: P TR TC
P pD (vcD TFC )
P (a bD) D vcD TFC
P bD 2 ( a vc) D TFC
a
D
2b
a vc
2b
(
a
vc
)
(
a
vc
)
4(b)(TFC )
'
D
2(b)
COST CONCEPTS
I.
B:
R
e
or v
e
n
u
e
TFC
D
p vc
'
D'
TFC
p vc
IT
F
O
PR
Volume (D)
Examples:
1. A company produces circuit boards to update the
outdated computer equipment. The fixed cost is $42,000
per month and the variable cost is $53 per circuit board.
The selling price per unit is p = $150 0.02D. Maximum
output of the plant is 4000 units per month.
(a) Determine the optimum value for this product.
(b) What is the maximum profit per month?
(c) At what volumes does break-even occur?
(d) What is the companys range of profitable demand?
Examples
2. A large semiconductor plant has approximately 95% of sales
due to a single circuit design. The plant can therefore be
considered to produce 3,000,000 printed circuit boards (PCBs)
per year. Presently, the plant is operating at 60% of capacity.
The selling price of the PCB is p = $19.25 (10- 6 )D, and the
variable cost per PCB is $15.75. At zero output, the plants
annual fixed costs are $1,000,000 and are approximately
constant up to the maximum production quantity per year.
a. What is the present expected annual profit or loss (60%
capacity)?
b. What the percentage of production capacity that will result in
optimal operation? What is the maximum profit or minimum loss
at this optimal volume?
b.Determine at what demand(s) breakeven occurs in the
operation
Examples:
3.A manufacturing company leases for $100,000 per year a
building that houses its manufacturing facilities. In
addition, the machinery in the building is being paid for
installments of $20,000 per year. Each unit of product
produced costs $15 in labor and $10 in materials and can
be sold for $40.
a.How many units per year must be sold for the company
to break even?
b. If 10,000 units per year are sold, what is the annual
profit?
c. If the selling price is lowered to $35 per unit, how many
units must be sold each year for the company to earn a
profit of $60,000 per year?
Examples
6.
A company has established that the relationship
between the sales price for one of its products and
the quantity sold per month is approximately D = 780
10p units. The fixed cost is $800 per month, and
the variable cost is $30 per unit produced. What
number of units should be produced per month and
sold to maximize net profit? What is the maximum
profit per month? Determine the range of profitable
demand.
Examples:
7. The annual fixed costs for a plant are P100,000
and the variable costs are P140,000 at
70%utilization of available capacity with net sales
of P280,000. What is the break even point in units
of production if the selling price per unit is P40.
Answer:
(a)
p = 1,000 - 0.2D
TC = 1,000 + 2D2
Profit
D*
(b)
D*.
d 2 (Profit)
= - 4.4 < 0
2
dD
$450X + $50 per year. The cost for loss of heat from
the pipe per meter is $4.8/X1/2 per year. Here X
represents the thickness of insulation in meters and
X is a continuous design variable.
a. What is the optimum thickness of the insulation?
b. How do you know that your answer in (a)
minimizes total cost per year?
Answer:
(a) Total Annual Cost (TAC) = Fixed cost + Cost of Heat Loss
= 450X + 50 +
4.80
X1/ 2
d (TAC)
2.40
= 0 = 450 - 3/2
dX
X
3/2
2.40
=
= 0.00533
450
X* = 0.0305
meters
2
d (TAC) for X >3.6
(b)
0. > 0
=
2
5/ 2
dX
Since the second derivative is positive, X * = 0.0305 meters is a minimum cost thickness.
(c) The cost of the extra insulation (a directly varying cost) is being traded-off against the
value of reduction in lost heat (an indirectly varying cost).
Seatwork:
1. A company has determined that the price and that
d (TR)
dD
88.5
(0.08)(1.75)
88.5
(0.08)(1.75)
d (TP)
dD
48.5
(0.08)(1.75)
48.5
(0.08)(1.75)
(c)
FC = [$350,000 - 0.1($350,000)](12) =
$3,780,000 per year (10% decrease)
vc = [$0.50 + 0.1 ($0.50)] = $0.55 per unit of
sales (10% increase)
$3,780,000
D =
= $8,400,000 per year
$1 - $0.55
2-20
(a) D =
CF
$2,000,000
=
= 40,000 units per year
p - cv
($90 - $40) / unit
D
TCA = TCB
Volume (D)
Examples
1. Two manufacturing methods are being
considered. Method A has a fixed cost of
P5,000 and a variable cost of P50. Method B
has a fixed cost of P2500 and a variable cost of
150. For what production volume would one
prefer (a) Method A, and (b) Method B?
2.